Euro slide resumes as Greek crisis begins to fade from headlines

Greece reached a deal in extremis with its creditors, which granted the latter nearly everything they demanded, and some of the harshest measures were passed by large majorities in the Greek Parliament on Wednesday. None of this was any help to the common currency, however.

Some hawkish statements from Federal Reserve Chairman Yellen, as well as Bank of England Governor Carney and MPC member Miles, contrasted with the ECB’s reiterated commitment to carry out its quantitative easing program in full. Undistracted by the Greek crisis, market attention was focused on the widening gap in monetary policies across the Atlantic and, increasingly, across the Channel, which sent the Euro tumbling over 2% against both the Dollar and Sterling.

Beyond the main currencies, the weakness in the New Zealand Dollar was notable, as the currency reacted badly to the falling price of dairy milk, the country’s main export.

GBP

Our expectations for a first Bank of England interest rate hike in the first quarter of 2016 received very strong support last week from none other than Governor Carney.

Mr Carney, speaking at the Treasury select committee, bluntly stated that “the point at which interest rates may begin to rise is moving closer”. Very strong wage growth data, which has been flagged by the MPC as the critical variable to determine the timing of the first interest rate hike, supported Carney’s hawkishness. Wages, including bonuses, rose 3.2% for the year, sharply higher than April’s 2.7% and indicating very solid real wage growth of over 2% above core inflation.

As Greece recedes from the headlines, we are increasingly comfortable with our interest rate call and are willing to state February 2016 as the most likely meeting for the MPC to push rates up. In line with this view, we have revised our forecasts for Sterling modestly higher against most G10 currencies.

EUR

On Monday morning, after a marathon of talks, Greece and its creditors finally reached an agreement.

Using the direct threat of Euro exit against an unprepared Greek Government, the creditors forced a very harsh set of measures before talks resume on a third bailout. These measures were duly approved, and now the focus is on Greece’s ability to restart its banking system. ECB President Draghi sounded one of few positive notes, allowing a modest increase to the emergency liquidity line to Greek banks and suggesting that more such increases would be forthcoming. Also it was announced that Greek Government bonds would be eligible for purchase as soon as the first program review is concluded.

Beyond the Greek headlines, we saw some weakness marring the recent streak of positive news from the Eurozone. Industrial production surprised to the downside, falling by 0.4% in May and leaving the second-quarter tracking number nearly 1% below the first quarter level. Core inflation dropped by 0.1% to 0.8%, suggesting that the ECB’s expectation for a rapid rise towards 2% may be too optimistic.

At any rate, markets are now solidly focused on the divergence in monetary policies and, for now, the path of least resistance for the Euro appears to be downwards.

USD

We had a rather negative surprise last week from the June retail sales number in the US.

The headline number was down 0.3%, confounding expectations for an increase. The core number, which excludes purchases of gas and cars, was down 0.1%. The April number was also revised down. Retail sales numbers, however, are among the most volatile and revision-prone of all economic data series in the US, and we want to see the July number before jumping to any conclusions.

Currency markets took a similarly sanguine view, and chose to focus on modestly hawkish statements from Chairman Yellen, who reiterated her view that interest rates will be raised in the US this year. The Dollar rallied against most of its G10 peers as a result.